Reacting to headlines is perilous!

You can avoid plenty of grief by reading headlines and as George Costanza (from the popular sitcom Seinfeld) says: “Do the opposite.”

You might notice that the average ‘Joe’ was far more concerned about his job (justifiably) until we began seeing headlines such as ‘Dow Hits Highest Close Ever.’ All of a sudden the stock market is once again a worthy topic for discussion and it’s okay to actually speak to one’s investment advisor. Judging by money flows it’s a good bet that clients are instructing their advisors to buy stocks, EFT’s, equity mutual funds or whatever it takes to get them invested and fast. There’s nothing but good news. As I type this, ‘Stocks resume winning ways’ appears on the TV screen (CNBC).

Before succumbing to the urge to herd let me take you back to June of 2010.

In the first chapter of A Maverick Investor’s Guidebook (Insomniac Press, 2011) I wrote the following:

In one newspaper, under the title “Economic crisis,” I found the headline: “World recovery under threat as growth slows, stimulus wanes.” On the same day in another newspaper, under the title “Recovery angst” was the similarly ominous caption: “Economic trouble is all investors see.”

If you are spooked by such nonsense and inclined to adopt a ‘wait-and-see’ approach before investing any of your money at all in financial markets, then give your head a shake. These headlines are gold!

I went on to pose the question: “If the press is even partially representative of what economists and strategists are recommending, and if investors all share the same sentiments, then what happens when there’s some good news?”

There was plenty of good news even in 2010, but it was generally delegated to those pages in the back of the newspapers which people seldom read. One example, and a very important one for stocks, was rapidly improving corporate profitability.

While the general mood was (and continued to be) let’s say ‘despondent,’ institutional and retail investors kept taking money out of stocks and channeling it into money market funds and bonds – to take advantage of what tiny returns were available in those securities (yes, I am being sarcastic).

Meanwhile in answer to my rhetorical – because it should have been obvious what the answer would be – question in 2010 we certainly know now what happened when there was good news. Stocks skyrocketed and recently surpassed their previous highs.

My concern today is that investors will make the same mistake they always seem to make. Rather than ‘interpreting’ headlines, they will simply take them at face value and chase the stock market at an inopportune time.

I am paraphrasing, but I’ve heard and read nothing but good news of late such as:

  • “It’s definitely a ‘risk on’ market.”
  • “Don’t fight the FED!”
  • “Looks like we might avoid the usual summer slowdown this year.”

Most worrisome: Kramer (wait long enough and you’ll eventually be right) is more wound up than a four-year old high on chocolate. I do believe that stocks are a better investment than bonds over the next several years, but the trend in corporate profitability (and consumer sentiment, GDP and job growth) will be interrupted – count on it – affording convenient opportunities to get invested. With nothing but good news and euphoria, what happens if we get some bad news? A chance to invest at lower price levels. Right now, ‘risk-on’ is exactly what you should expect if you respond to headlines.

Click on this link for a chuckle: George Costanza Does the Opposite

Mal Spooner

 

 

 

 

 

Is AAPL bruised or beginning to rot?

There’s a huge difference between Apple the company and AAPL the stock.  Back in July when the stock seemed to headed to the stratosphere I began to get concerned.  At the risk of seeming ridiculous (which has never stopped me before fyi) I will quote myself at the time:

 “The market value of Apple Inc. has ballooned.  It really hasn’t mattered that Android devices are kicking butt; rapidly gaining market share and being adopted by the more technology-savvy consumers (the nerdy trailblazers).  Until now?” July 29th, 2012

Apple’s 2nd quarter results had just been released and were considered disappointing by most analysts.  However my misgivings were based more on experience than the company fundamentals.  Over decades I’ve watched stock market darlings follow a pattern time and again.  At the outset it’s product itself that folks fall in love with, but eventually it’s the company’s stock they become infatuated with.

Admittedly the rewards to the company are plentiful if the product catches fire, especially in the middle stages of the lifecycle (pricing power and growing demand), but gradually management is obliged to focus on producing more and more of the product; which can mean skyrocketing revenues and economies of scale (reduced costs of manufacturing) – good for the company and its investors.  Eventually competition rears its ugly head, and the company is forced to innovate rapidly (rising expenses) to keep market share.  Competition (Android devices offered by the likes of Samsung, Research in Motion) will inevitably cause prices and profit margins to fall.

Finding a new hit ‘premium-priced’ product is difficult to do unless the company is managed by a tyrannical genius like Henry Ford or Steve Jobs (who can be oblivious to the rantings of those myopic stakeholders who’d rather have dividends than invest in research and development).

One might think that the stockprice should mirror the fortunes of the company.  But there are periods when this just isn’t the case.  This is the chart I was looking at (back in the summer months) when I began to get the heebeejeebies.  The financial results weren’t that impressive, but the share price had gathered its own momentum.

A GOOD  THING: Lineups to buy iPhones and iPads.  DANGEROUS: Lineups to buy shares.

I like to think the stock market  is like a party.  When my daughter was a teenager, she asked if my wife and I could disappear for a few hours one evening so she could invite some friends over for a party (I’m sure this has happened to many of you).  Things went fine until a contingent of uninvited guests began showing up.  No doubt a few more youngsters added to the fun, but once the house was too crowded bad things began to happen – items got broken, drinks were spilled on hardwood floors and carpets, there were empty bottles scattered all over the property and suddently her little party turned into into a nightmare.

When uninvited people (not really investors) scramble to own a stock it usually ends up like my daughter’s party.  At first a few more (uninvited) investors drives up the price which is great for existing shareholders and the company.  Indeed, AAPL shares continued to ramp up into the final quarter of 2012.  But just like my daughters party, things began to get ugly for the stock once it got too crowded.

 There is much speculation concerning the causes of the rapid decline in the price of AAPL shares:  Weak demand for the iPhone V, the threat of Android market penetration and so forth.  Some of this might be true, but pure speculation doesn’t ordinarily impact the price of a company’s shares this radically.  Hard evidence will hurt the stock to be sure but my own experience is that as soon as people realize they’re at a party that just isn’t as much fun as they’d hoped for then they all try to leave at the same time.  There is a great deal of risk associated with buying into stock market darlings.

I mentioned above that there can be a huge difference between the fortunes of the company and the behavior of the stock.  It could very well turn out that Apple (the company) will continue to thrive despite the decline in the share price.  After all there are a great number of people that still plan to buy iPhones.  No doubt there are also many planning to buy other Apple devices.

A recent survey suggested that 50% of those asked what smartphone they intend to buy over the next ninety days said they wanted an iPhone.  This is the same result Apple has enjoyed for that past couple of years.  There will come a time when the company will have to come up with another big hit product or re-invent itself.  After all the company was nearly banktrupt once (1987) and survived.  The introduction of the iPhone in 2007 certainly gave Apple another shot of adrenalin.

There’s no evidence to suggest Apple the company is beginning to rot just yet, but AAPL the stock was due to take a bruising.  Can Apple continue to take advantage of its solid franchise indefinitely without Steve Jobs?  Well that’s the billion dollar question isn’t it?

Mal Spooner